Too Big To Jail? The Top 10 Civil Cases Against the Banks

The Justice Department’s initial response to the financial crisis did not take long to materialize. In June 2008, three months before the Lehman Brothers collapse, the department brought its first criminal case, charging two former Bear Stearns executives with securities fraud for their alleged roles inflating the housing bubble.

A little more than a year later, a jury found the executives not guilty, dealing the DOJ an early setback. Since then, government investigations into the crisis have almost exclusively centered on civil charges, which requires prosecutors establish guilt beyond a preponderance of the evidence. The bar is higher in criminal cases, requiring they prove guilt beyond a reasonable doubt.

Here are 10 of the most prominent of those cases to date. In nearly all, the government won multi-million dollar settlements, but the companies and officials involved were not required to admit wrongdoing.

Bank of America

In October 2012, the Department of Justice brought civil charges against Bank of America, alleging the firm defrauded taxpayers by misrepresenting the quality of loans it sold to Fannie Mae and Freddie Mac.

The case centers around a lending program started at Countrywide Financial, the California mortgage originator purchased by Bank of America in 2008. According to the complaint, Countrywide eliminated checks on loan quality as part of a streamlining effort referred to inside the company as “the Hustle.” It then sold the loans to Fannie and Freddie, leading to heavy losses at the U.S.-backed mortgage giants. Fannie and Freddie would later seek a combined $188 billion in federal aid. “The fraudulent conduct … was spectacularly brazen in scope,” according to the complaint. Prosecutors said they would seek at least $1 billion in damages. The case is ongoing.

Citigroup

Securities and Exchange Commission v. Citigroup, Inc.

The Securities and Exchange Commission’s 2010 case against Citigroup and two of its executives marked a pair of firsts. The case was the first time the commission brought charges against bank executives for their involvement with subprime mortgage bonds. It was also the first case to ask whether banks kept shareholders well enough informed about the health of their balance sheets during the crisis.

In its complaint, the SEC alleged that during the summer and fall of 2007, Citigroup “made a series of material misstatements” suggesting it had $13 billion worth of mortgage-related assets that were losing value. What Citigroup failed to disclose, according to the SEC, is that it was also exposed to another $43 billion in similar assets that would go on to sour. By the time Citi told investors about them in November 2007, the assets had been downgraded by the major credit rating agencies.

Not every trial ends with a jury issuing a call to arms to the losing prosecutor, but that is what happened in the case of former Citi executive Brian Stoker.

Stoker was on trial for his role in the sale of exotic mortgage-related securities. In 2007, he helped develop sales materials for $1 billion worth of collateralized debt obligations, or CDO’s, whose value was tied to the housing market. Stoker misled investors, according to the SEC, by not disclosing that Citigroup helped choose the underlying mortgage securities in the CDO and then bet against it.

In July 2012, a jury ruled that Stoker was not liable. In a rare move, however, it issued a statement that read, “This verdict should not deter the S.E.C. from investigating the financial industry, to review current regulations and modify existing regulations as necessary.” As the jury’s foreman later told The New York Times, “I wanted to know why the bank’s C.E.O. wasn’t on trial … Citigroup’s behavior was appalling.”

Citigroup paid $285 million to settle the case. Credit Suisse, which managed a portfolio of bonds used as collateral in the deal, agreed to a $2.5 million penalty.

Countrywide Financial

Before the crisis, Angelo Mozilo was best known as the Bronx-born son of a butcher who rose to build the nation’s largest mortgage lender, Countrywide Financial. After the bubble burst, he became the first prominent executive to be penalized for his role in the meltdown.

The SEC charged that Mozilo misled investors about Countrywide’s lending practices, citing e-mails in which he referred to its products as “toxic” and “poison.” When the credit squeeze hit, Countrywide’s financing rapidly dried up. In July 2008, it was taken over by Bank of America.

The next year, Mozilo would faces charges of securities fraud and insider trading in a civil suit brought by the SEC. In October 2010, he settled the case, agreeing to a $67.5 million penalty that also barred him from serving as an officer or director for any publicly traded company. Two colleagues also named in the suit agreed to pay an additional $5.65 million.

Fannie Mae and Freddie Mac

Fannie Mae and Freddie Mac, which guarantee roughly half of all U.S. home loans, exist to help keep the mortgage market afloat. During the crisis, however, the two firms verged on the brink of collapse, costing taxpayers approximately $188 billion in rescue funds.

In December 2011, the SEC filed charges against six former Fannie and Freddie executives who nearly sunk the mortgage giants, alleging they knowingly misled investors about their exposure to risky subprime loans.

According to the SEC, Fannie told investors in 2007 that it had less than $5 billion in subprime loans on its books. The SEC said the true figure was closer to $43 billion. Similarly, in 2006, Freddie disclosed between $2 billion and $6 billion worth of subprime loans, far short of the $141 billion the SEC alleged was on the books.

Fannie and Freddie entered into agreements accepting responsibility for its conduct, though neither admitted or denied the charges. For their part, the six executives named in the case promised to challenge the government, arguing that the companies consistently disclosed the makeup of their loan portfolios. The cases are ongoing.

Goldman Sachs

To date, the biggest penalty to emerge from the crisis is the $550 million settlement that Goldman Sachs agreed to in July 2010.

The case stemmed from a mortgage security called Abacus 2007-AC1. The SEC alleged Goldman misled investors by failing to reveal that the hedge fund manager who created Abacus, John Paulson, was betting against the same mortgage bonds that made up the security. The firm did not formally admit to the allegations in the settlement, but did acknowledge that marketing materials for Abacus “contained incomplete information.”

The case against Fabrice Tourre, a Goldman vice president named in the complaint, is scheduled for trial in July.

IndyMac

IndyMac specialized in Alt-A loans, the type of risky mortgages that banks once lent to borrowers who declined to prove their incomes or net worth. The strategy failed, and when federal regulators seized IndyMac in July 2008, it was the second largest bank failure in U.S. history.

In February 2011, the SEC accused three former IndyMac executives of making false and misleading statements about the bank’s health in quarterly filings. S. Blair Abernathy, a former chief financial officer with the firm, settled for $100,000. He also forfeited $25,000 in earnings. Michael Perry, the firm’s former CEO, paid an $80,000 penalty. Charges against a second CFO, A. Scott Keys, were dismissed by a federal judge in May 2012.

JPMorgan Chase

Before being bought out by JPMorgan Chase in 2008, executives at Bear Stearns had a term for an underperforming home loan: a “s*** breather.” Nonetheless, the company packaged such loans into mortgage-backed securities, and then sold them with the knowledge that the underlying assets were likely to default, according a civil suit filed against JPMorgan in October.

The case, which is still pending, was the first to be filed by a federal task force established by the Obama administration to investigate alleged mortgage fraud. In all, investors lost approximately $22.5 billion, according to the complaint, or roughly one-quarter of the original principal balance of $87 billion.

JPMorgan Chase and Credit Suisse

The SEC won a combined $417 million settlement from JPMorgan and Credit Suisse in November over charges that the two firms misled investors in the sale of troubled mortgage securities.

The JPMorgan case, announced alongside the Credit Suisse settlement, dated back to the 2006 sale of $1.8 billion of mortgage-backed securities. JPMorgan assured investors that only four loans used as collateral in the securities were at least 30 days delinquent, when according to the SEC, more than 600 were past due. JPMorgan made $2.7 million on the deal, the SEC said, while investors lost at least $37 million.

Credit Suisse, meanwhile, was faulted for keeping $55.7 million in cash settlements it received from mortgage lenders for problem loans it purchased and then turned into mortgage-backed security trusts.

JPMorgan paid $296.9 million to settle the charges, while Credit Suisse paid $120 million. In a statement, Robert Khuzami, director of the SEC’s enforcement division, called the shoddy mortgage products sold by both banks “ground zero in the financial crisis.”

Washington Mutual

The Federal Deposit Insurance Corporation brought its first civil action against a major bank CEO in 2011 with a case against three former Washington Mutual executives. According to the complaint, the executives “focused on short term gains to increase their compensation, with reckless disregard for WaMu’s longer term safety and soundness.”

WaMu ultimately lost billions as a result of the strategy. The FDIC sought $900 million in penalties. The executives named in the case — Kerry Killinger, the bank’s former CEO, Stephen Rotella, its former president, and David Schneider, its former home loans president — eventually agreed to a $64 million settlement, however all but $400,000 of that amount was covered by insurance policies taken out by WaMu on behalf of their executives.

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